Sterling at fresh lows as rate rise fears ease

Sterling hit a two-and-a-half month low against the euro today due to growing expectations of a long spell of low interest rates in the UK.

The pound dipped to €1.138 and also hit a six-week low against the dollar.

The euro was boosted by a strong reading of German business sentiment. The Ifo Business Climate Survey improved for a fifth month, and by more than had been expected.

But most of the pressure on the pound was due to a rise - and falling yield - on two-year UK government bonds. The gilt yield hovered near an all-time low of 0.816%, reflecting the view that UK interest rates will stay at a record low 0.5% for a while to help revive the economy.

The low yields make British debt less attractive to buy than European equivalents, putting pressure on the pound.

Sterling slipped 0.5% against the dollar to $1.6237, its lowest since mid-July. It also hit its weakest level against the Australian dollar since 1996.

Analysts expect the Australian central bank to raise interest rates much faster than the Bank of England, which is still busily printing money through a £175bn programme of quantitative easing.

On Monday, Israel, which was one of the world's first economies to cut interest rates last year, became the first developed nation to increase its lending rate. The Bank of Israel announced a rise from 0.5% to 0.75%.

Recovery-cooling rate rises will only be ordered in the UK once the programme of economy-boosting quantitative easing has ended.

Bank of England deputy governor Charles Bean said yesterday that the response to its QE had been 'mildly encouraging'. Gilt yields appeared to be 50-75 basis points lower than they would be in the absence of the programme, he said.

The City has been repeatedly wrong-footed by the monetary policy committee's money printing plans. It was surprised when it looked like QE would be ended in July. It was caught off-guard again when the Bank said it would then pump a further £50bn into the economy. It then emerged earlier this month that Bank governor Mervyn King had wanted to extend the plan even more, by £75bn, but was outvoted.

That revelation, and the implication that King is worried about the economy, has hardened expectations of low rates for the forseeable future and kept pressure on the pound.

Sterling also struggled against the yen, sliding to a one-month low around of around 153 yen, its lowest in a month. That came despite fresh doubts about Japan's economic recovery. Exports were down 36.5% year-on-year in July, a worsening from 35.7% in June.